Short Notes of banking for XII

Q.15. Write Short Notes.

PROMISSORY NOTE

The promissory note is one of the simplest forms of the credit instrument. Section 4 of the Act defines a Promissory Note as an instrument in writing not being bank note or a currency note containing an unconditional undertaking signed by the maker to pay a certain sum of money only to or to the orders of a certain person to the bearer of the instrument.

Characteristics of a Promissory Note

The essential characteristics of a promissory note are as follows

i. It is a written document signed as follows.

ii. It contains an unconditional promise to pay.

iii. Besides an acknowledgement a promissory note is an express promise to pay.

iv. Promissory note must always relate to a definite and certain amount of legal money of the country and not to foreign money.

v. It should not be a bank note or currency note.

vi. No particular from is prescribed for it.

vii. A promissory note is not payable to the bearer on demand.

viii. The person to whom the promise is made must be definite person.

DRAFT

A draft is a cheque drawn by one branch of a bank upon another situated at any other place required to pay a fixed / certain amount of money to a specified person or by his order. A bank draft may either by inland or foreign. Drafts are issued by benders after receiving written and signed applications. The person is required to remit the required amount of money along with its commission. The banker hands over the draft to the depositors and sends a credit advice to the branch upon which the draft is drawn.

Draft are a common media of transferring money from one place to another. They are of great importance for financing trade, specially foreign trade. The draft is also known as demand draft.

LETTER OF CREDIT

The letter of credit is a request made by the issuing bank to its correspondent or agent making the request on demand on any draft on the issuing bank up to the amount mentioned in the letter of credit. A letter of credit remains enforced for a fixed date only. They are issued only to the persons who furnish guarantee or securities or make payment of the full amount there in. The L.C’s are of great significance in international trade. Specially the importers and exporters frequently use them. It saves from the trouble of carrying money from place to place with the risk of loss or theft.

Crossing of a Cheque

Q.14. What do you understand by the term Crossing of a Cheque?

CROSSING OF A CHEQUE

A Crossing is a direction to the paying banker that the cheque should be paid only is a specified banker named in crossing. A cheque is said to be crossed when it bears across it is face the transfers lines without any words on them.

Crossing prevents the cheque from being cashed by anyone except the payee. This ensures safety of payment by means of cheques. It affords security and protection to the true corner. Cheques are crossed in order to avoid losses arising from open cheques. However it does not affect the negotiability of a cheque.

Endorsement

Q.13 (A). Define Endorsement.

Q.13 (B). What are the different kinds of Endorsement?

ENDORSEMENT

The word Endorsement has been derive from the Latin word ‘’Indorsum’’ which means ‘’on the back’’. Anything written or printed on the back of a deed or instruments is called endorsement. When the member or holder signs his name on the negotiable instrument for the purpose of negotiation i.e. direction to pay the amount to another person is called Endorsement. Section 15 of the Negotiable Instrument Act 1881 defines Endorsement as

When the maker or holder of a negotiable instrument sign the same, otherwise than as such maker for the purpose of negotiation on the back or face therefore on a slip of paper or so signs for the same purpose a stamp paper intended to be completed as a negotiable instrument he is said to endorse the same and he is called the endorse.

KINDS OF ENDORSEMENT

Different kinds of Endorsement are as follows.

i. Blank or General Endorsement

When the endorser simply put his signature on the back of the instrument without specifying the name of the endorsee, it is said to be general endorsement. The holder can convert it in full endorsement by writing the name of the payee above the signature of the endorsee.

ii. Special or Full Endorsement

It specifies in addition to the signature of the endorser the person to whom or to whose order the instrument is payable.

iii. Restrictive Endorsement

An endorsement which prohibited further negotiation of the instrument is called restrictive endorsement. For instance if a cheque is endorsed saying "Pay Aonly" or "Pay A for A/C of B" the endorsed has no power to transfer his right further.

iv. Partial Endorsement

An endorsement which makes the transfer of the instrument from the endorser to the endorsee after the fulfillment of stated conditions is called Partial Endorsement.

Sans Recourse

When a person wants to exclude his liability to the endorse or any subsequent holder in case of dishonor of the instrument. The Endorser fees himself from his liability on a negotiable instrument by writing the words SANS RECOURSE after the name of the endorsee. He should make it clean that he endorsee or the holder should not look to him for payment in case of the dishonor of the instrument. The endorsee may refuse to take an instrument with such an endorsement.

Dishonor of Cheque

Q.12 (A). What do you mean by Dishonor of a cheque?

Q.12 (B). Under what circumstances a cheque is said to be dishonored.

DISHONOUR OF A CHEQUE

The relation between a banker and his customer is that of a debtor and a creditor. Money deposited will always belong to the customer and the bank will be bound to return its equivalent to the customer or to any person to his order. But in certain cases a banker refuses to honour his customer’s cheque. When the payment of the cheque is refused by the bank, it is said to be dishonored.

REASONS FOR DISHONOUR

A cheque may be dishonored under the following circumstances.

i. When balance to the credit of the customer is insufficient to meet the cheque.

ii. When money deposited cannot be withdrawn on demand in the case of fixed deposit.

iii. When the customer closes the account before the cheque is presented for encashment.

iv. When the cheque is not properly drawn.

v. If the cheque is crossed but presented on counter for the payment.

vi. When the cheque is post dated.

vii. If death information of the A/C holder is received.

viii. If the A/C holder is declared insolvent by the law.

ix. If the A/C holder has stopped the payment.

x. If the signature on the cheque is different with the specimen signature.

xi. If the amount written in figures is different from the amount written in words.

xii. If the cheque is presented for payment at a branch other than the one where the customer has the account.

Kinds of Cheque

Q.11. Define the different types / kinds of a cheque.

TYPES / KINDS OF A CHEQUE

Cheque may be of different types. Some of them are

Order Cheque

Order Cheque is that which is expressed to be so payable or which is expressed to be payable to a particular person without containing words prohibiting transfer or indicating that it will not be transferable.

Open Cheque

They are payable in cash at the counter of the banks to the bearer of the cheque.

Crossed Cheque

These types of cheques are not in cashed at the counter but which can be collected only by a bank from the drawer bank. But these days an individual can also draw a crossed cheque for the purpose of safety and security in certain cases.

Bearer Cheque

A bearer cheque is that which can be cashed for the bank by the bearer of the cheque. Any person who is in possession of a bearer cheque can cash it without any difficulty.

Cheque

Q.10 (A). Define a Cheque?

Q.10 (B). Name the parties to a cheque.

Q.10 (C). What are the essentials of a cheque?

Q.10 (D). Draw a specimen of a cheque.

CHEQUE

Section B of the Act defines a cheque as, ‘’A bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand.’’ A cheque is a bill of exchange but a bill of exchange often is not a cheque. A cheque is always payable on demand. The person drawing or making the cheque must be a customer of the bank and must be having the required find as deposit with the bank.

PARTIES TO A CHEQUE

The parties to a cheque are

Drawer He is the maker of the cheque. He must be the holder of the account at the bank and must sign the cheque as per specimen signature.

Drawee He is the banker with whom the A/C is maintained by the drawer of the cheque.

Payee He is a person named in the cheque to whom or to whose order the payment is to be made.

ESSENTIALS OF A CHEQUE

A cheque must have the following features / essentials.

i. It must be in writing but should not be written by a pencil.

ii. It must be an unconditional order to pay. The drawer must not pay any condition for the payment of cheque.

iii. It must be signed by the person giving it.

iv. Cheque must be drawn upon a banker not else.

v. It must be for the payment of a certain sum of money only.

vi. Amount of money must be written in figures and words.

vii. The cheque must be payable on demand.

Credit Instruments

Q.9(A). Define Credit Instruments.

Q.9(B). Define the different kinds of Credit Instruments.

CREDIT INSTRUMENTS

Credit Instruments are the documents describing details of credit and debit. Credit Instruments provide a written means fro future reference describing terms and conditions of any debt and loan. Credit Instruments may be an order for payment of money to a specified person or it may be a promise to pay the loan. Credit Instruments generally in use are cheques, bills of exchanges, bank overdraft etc.

KINDS OF CREDIT INSTRUMENTS

There are two broad kinds of Credit Instruments.

1. Negotiable Instruments

According to the negotiable instruments Act under Section 13-A, A negotiable instrument means a cheque promissory note and a bill of exchange which are payable to the bearer of the instrument or the person to be ordered.

Features of Negotiable Instruments

i. It must be unconditional

ii. It must be in writing

iii. It is payable on demand or the period for the payment which is determined.

2. Non-Negotiable Instruments

Non-Negotiable Instruments can not be transferred or the documents which are restricted to transfer by the issuer e.g. Money Order, Postal Order, Shares Certificate etc. Such documents appears at the name of the beneficiary and the payments are made only to those persons to whom the instruments are made payable.